Read our case study on working with a charity to construct its ethical policy.

Why have an ethical policy?

We recently met with a medical research charity where they had historically decided not to place any ethical restrictions on the portfolio in fear of the detrimental impact on future financial returns. The new Chief Executive raised concerns with the Trustee board over potential negative impact to fundraising if supporters learnt that the charity invested in areas contrary to the organisation’s purpose. The Trustee board debated the issues and the areas of real concern were identified as smoking and obesity, both have a direct correlation of the diseases the charity was set to eliminate.

How to limit the charity’s exposure to the tobacco industry?

Tobacco was a relatively straight forward discussion as it is easy to identify those companies that manufacture the product. The Trustees accepted this may at times have a negative impact on performance (tobacco companies represent c.5% of the UK equity market and c.4% of the global equity market). However, it would be difficult to defend the inclusion of tobacco stocks within the charity’s portfolio. This restriction could easily be implemented across the charity’s direct equity holdings (some 50% of the portfolio) but would be more difficult to enforce with investments in collective investment schemes. The board agreed to take a practical approach by requiring their investment manager to monitor indirect holdings to ensure the portfolio’s exposure was kept to a minimum. In addition, as the investment manager we agreed to include an analysis of the individual and overall exposure in our quarterly reporting. This would ensure the charity knew how much exposure it had (if any) to tobacco producers.

Tobacco distributors

The board then went on to discuss the tobacco supply chain (i.e. the distribution and sale of tobacco).  It was agreed that it would be impossible to exclude organisations involved in the supply chain as for many business this would be a diminutive percentage of their overall business, and would encompass a great number of companies ranging from supermarkets to oil companies operating service stations.  A pragmatic solution was agreed, as their investment manager we were asked not to invest in any business where significant revenue came from the tobacco industry.

How to take into consideration obesity issues in the charity investment strategy?

The rise in obesity was a more challenging debate. Evidence supports the argument that there is a direct correlation between obesity and the charity’s cause. The increase in salt and sugar in people’s diet has been a significant contributory factor to the rise of obesity as has the increase sale of processed food. Salt and sugar are both essential components of a balanced diet and as pointed out by the medical experts on the Trustee board: there was no conclusive scientific evidence that taken in moderation either were harmful. Therefore, how would we be able to identify companies which actively promoted excess or abuse? The Trustees would rely upon the investment manager to avoid companies guilty of bad practices through our overall approach to responsible investment.

Should the charity exclude armaments from its portfolio?

One of the Trustees asked if armaments should be excluded because conflict in any guise is detrimental to health.  As there was no direct connection it was agreed that arms should not be a specific exclusion but as a responsible investor we would not want to invest in controversial weapons.

How do we document these ethical considerations?

The conclusion for the discussion is now enshrined in the statement of investment policy.

The Charity precludes any direct investment in tobacco companies. The Trustees accept that some collective investment schemes may have exposure to tobacco stocks. However, the investment manager will monitor the position of these collective investment schemes to ensure this is kept to a minimum.

In principle the Trustees wish to be responsible investors. Therefore the investment manager is expected to take account environmental, social and governance (ESG) issues in their investment analysis and decision-making processes and engage with company management when appropriate.

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